Research

Job Market Paper

Official Arm-Twisting? Measuring the Federal Reserve’s Use of Moral Suasion [Paper, Online Appendix]

Abstract: Moral suasion refers to efforts by government officials to encourage, urge, or pressure private agents to take specific actions, rather than relying on formal policies. I use large language models to construct the first measure of the Federal Reserve’s use of this tool from 1979 to 2024. It was most contractionary in 1980 and the mid-2000s, and most expansionary during the financial crisis and in 2020. It is used primarily to manage prudential risk or influence lending, and is deployed countercyclically. Text-based evidence indicates moral suasion is most effective when backed by supervisory force and aligned with financial institutions’ incentives.

Borrowing Constraints, Markups, and Misallocation – with Huiyu Li, Chen Lian, and Yueran Ma [R&R at Review of Economic Studies, Link]

Abstract: We document new facts that link firms' markups to borrowing constraints: (1) less constrained firms within an industry have higher markups, especially in industries where assets are difficult to borrow against and firms rely more on earnings to borrow; (2) markup dispersion is also higher in industries where firms rely more on earnings to borrow. We explain these relationships using a standard Kimball demand model augmented with borrowing against assets and earnings. The key mechanism is a two-way feedback between markups and borrowing constraints. First, less constrained firms charge higher markups, as looser constraints allow them to attain larger market shares. Second, higher markups relax borrowing constraints when firms rely on earnings to borrow, as those with higher markups have higher earnings. This two-way feedback lowers TFP losses from markup dispersion, particularly when firms rely on earnings to borrow.

Modeling Distress in Private Credit Direct Lending – with Caio Ferreira and Dmitry Yakovlev 

Abstract: This paper develops a framework for translating macroeconomic stress scenarios into borrower-level distress in private credit direct lending. The framework models distress through borrower fundamentals rather than disruptions to financial intermediation. Because scenarios are specified in GDP, inflation, and interest rates—the same variables used in bank stress tests—the framework can be run alongside a bank stress test to cover direct-lending exposures. Distress is defined narrowly as the exhaustion of liquidity buffers and payment-in-kind (PIK) flexibility in the face of a persistent cash-flow gap, rather than as a covenant breach, which can occur well before a borrower becomes unsustainable. We generate each borrower's path of earnings before interest, taxes, depreciation, and amortization (EBITDA) in two steps. First, we estimate how each percentile of the EBITDA distribution responds to GDP, using U.S. small-cap firms during the global financial crisis, and project the distribution forward under the scenario's GDP path. Second, we model each borrower's movement within that projected distribution as a stochastic rank process. We illustrate the framework with a severe stagflation scenario and the Federal Reserve's 2026 supervisory severely adverse scenario. Under stagflation, the double shock to earnings and interest rates produces very high levels of distress, because borrowers are highly levered and their coupons float with rates. The Fed scenario, in which rates fall, generates less than half as much distress. Liquidity buffers and PIK reduce distress substantially and delay it, replacing an early spike with a gradual build, and they make distress less sensitive to leverage, spreads, and mandatory non-interest expenses. Leverage determines the depth of the cash-flow gap, while liquidity buffers and PIK determine whether that gap becomes distress.